Modelling the impact of audit/remuneration committee overlap on debtholders' perceptions of accounting information quality: The role of CEO power

Abstract

This study examines how debtholders perceive accounting information quality of firms with audit committee members who are also on the remuneration committee, and whether strong CEO power enhances or undermines the governance role of overlapping committees. Using 841 observations of Malaysian firms over the period 2013–2015, we find that firms with overlapping audit and remuneration committees are perceived by debtholders to be transparent and of lower operating risk and, consequently, be associated with lower cost of debt. We also find that the beneficial effect of the presence of overlapping committees is weakened by the level of CEO power. Our results are robust to concerns of endogeneity and alternative measurers of the key variables. This study is timely in light of recently increasing call for the broadening of audit committee members' understanding of business strategies, risks and incentives provided by firms' executive compensation structures. Our study also contributes to the ongoing debate surrounding CEO power by suggesting that debtholders perceive potent CEO power as detrimental to their investments and thus charge higher interest rates from firms with powerful CEOs and overlapping directors.

The influence of the chairman and CEO effectiveness on operating performance: Evidence from Malaysia

“…The CEO is in charge of the overall business operations including strategic, operating, and financial matters, taking a major role in the control and assurance of the firm's operations (Amran et al, 2014). The CEO thus influences the firm's policies, decisions, and results (Al-Dhamari et al, 2020). Generally, a change in the leadership structure from CEO duality to non-duality improves (Yasser et al, 2015): duality means that the Chairman is also the CEO of the firm, and non-duality that the posts are held by different individuals (Lam & Lee, 2008).…”

CEO power and corporate strategies: a review of the literature

“…These studies also generated mixed results. Six studies (Abernethy et al 2015;Al-Dhamari et al 2022;Henderson et al 2010;Hill et al 2016;Luo 2015;Zhu et al 2021) have incorporated the CEO power index to examine whether CEO power can explain executive compensation. Moreover, the influence of CEO power on executive compensation in developed markets in the post-financial crisis period is scant.…”

“…However, further research is needed in most of these areas as the evidence is scant and inconclusive. So far, only three studies have examined whether CEO power has any bearing on audit committee effectiveness (Kim et al 2017;Lisic et al 2016;Al-Dhamari et al 2022). Since CEOs are essential in determining board composition, more comprehensive evidence is needed on how CEO power shapes the functioning of audit committees.…”

“…However, CEO power acts as an impediment to this process. Extending this line of research, Al-Dhamari et al (2022) advance that powerful CEOs weaken the favorable impact of the overlap between audit and remuneration committees on the cost of debt. Combs et al (2007) adopt event study methodology to measure the interaction of board composition and CEO power in the event of CEO deaths.…”

Firm performance and CEO turnover: the moderating role of CEO attributes

“…Prior literature has predominantly focused on the tenure of the CEO as a proxy for experience (Walters et al, 2007) or power (Brookman and Thistle, 2009;Dikolli et al, 2014;Al-Dhamari et al, 2020), which is usually measured as the number of years in office. However, beyond tenure in office, some CEOs have prior experience of working in the company, which they bring to their role as CEO and which also means that they are familiar with the company's internal workings and strategic decision-making process.…”